Currency wars, central bankers’ speeches and gold

The U.S. Comex gold futures sold off 1.07% on Monday and stabilized on Tuesday at $1,649.60. The gold futures fell 1.56% year-to-date. After plunging 2.02% last week, the Euro/Dollar inched up 0.67% this week to 1.3454 on Tuesday. The S&P 500 index climbed 0.10% while the Euro Stoxx 50 index rose 0.70% in the past two days.

Why the Sudden Drop in Gold Price?

Given China is on holiday this week to celebrate the Lunar New Year, physical gold demand in the Shanghai Stock Exchange is expected to slow down after a year-on-year jump of 10% in January and February. Technical weakness caused by the decline in physical demand from Asia as well as concerns about European politics led to the sell-off in gold on Monday. Gold traders also speculated that the G7 countries would issue a statement ahead of the G20 meeting in Moscow this weekend to commit countries not to devalue their currencies unilaterally. Gold price has benefited as a hedge against fiat currency devaluation. The aversion to currency wars will likely hurt gold demand and gold prices. On Tuesday, the G7 officials released a statement saying that the macroeconomic policies will be conducted based on domestic objectives and will not be used to target exchange rates.

Central Bankers' Speeches Influenced Gold Prices

In his address to the Spanish Congress, the ECB President acknowledged the significant reform progress in Spain, and predicted that Europe will recover in the second half of the year. A stronger Euro/Dollar, or a weaker U.S. Dollar, would support gold prices. On Monday, the U.S. Fed Vice Chairman suggested that the Fed can continue to hold interest rates near zero percent even after the inflation and unemployment targets have been reached. This means that there would not be an automatic trigger in the interest rates as feared by the market, thus supporting gold prices. After reading the various G7 statements, the market will now turn its attention to the St. Louis Fed President's speech on Feb. 13, the Cleveland Fed President's speech on Feb. 15 as well as the G20 meeting on Feb. 15-16.